The Treasury Departments proposed curbs on the State and Local Government Series securities program are overreaching and would force issuers into other investment options that could give rise to arbitrage problems, municipal bond market participants warned yesterday.
The proposed new regulations almost completely fail to understand the day-to-day realities of public finance, Willis Ritter, a tax partner with Ungaretti & Harris who helped create the original SLGS program in 1972 when he served as an attorney-adviser on tax-exempt bonds at Treasury, said in a telephone interview.
They essentially freeze any state or local government issuer into the SLGS program with little or no future flexibility in their investments. I believe this runs directly counter to the purpose of the SLGS program as an adjunct to the federal arbitrage rules, said Ritter, who chaired a National Association of Bond Lawyers committee that submitted comments on the proposed curbs.
His comments came as a wide range of municipal market participants filed written comments on the proposed regulations by Tuesday nights deadline.
The so-called SLGS program, which is operated by the Bureau of Public Debt, is designed to help state and local governments avoid earning prohibited arbitrage profits when reinvesting bond proceeds. The most recent substantial changes to the program were made in 1996, when Treasury made it more flexible for issuers to use.
Treasury proposed stringent policy and procedural changes to the SLGS program on Sept. 30 of this year as a measure to crack down on perceived abuses. The final rules would be effective prospectively once published.
The comments at times were strongly worded, describing some of the proposed changes to the rules as an overreaction, unwarranted and draconian. In general, they disagreed strongly with the proposed broad policy changes to the program. However, they supported some of the proposed changes that would ease Treasurys administrative burdens related to the SLGS program.
We recognize that some changes to the program are warranted, given Treasurys concerns, but you dont want to go too far to a point where you are pushing issuers away from SLGS and into marketable securities in large numbers, said Michael Decker, senior vice president for research and policy for The Bond Market Association, in a telephone interview.
We think that Treasury can address their concerns with far fewer changes than they are proposing, agreed Steve Wisloski, a senior managing consultant with Public Finance Management Inc., a financial adviser, from his Harrisburg, Pa., office. We want to urge Treasury to try to minimize the impact to issuers as much as possible.
Issuers are concerned that the proposed rules could force them into open market securities where they could face problems with arbitrage compliance, said Susan Gaffney, federal liaison director for the Government Finance Officers Association and coordinator for the Public Finance Network, in an telephone interview.
They are very concerned that we are setting the clock back, and we are going to be back in an atmosphere where there are severe yield-burning issues out there, which is one of the express reasons the program was changed in 1996, Gaffney said.
Roger Anderson, who was the deputy assistant Treasury secretary for federal finance in 1996 and is now executive director of the New Jersey Educational Facilities Authority in Princeton, N.J., called the rules overreaching. I think it is going to decrease the attractiveness of the program, and that is going to hurt everybody, if those regulations are adopted as proposed, he said in a telephone interview.
But commentators did agree on a handful of the proposed changes. We believe these changes would eliminate most of the concerns they have and still preserve what we think is important, which is the ability for issuers to have a flexible SLGS program, lock in the best rates, and cancel when some circumstances dictate that it is necessary, said Mitchell Rapaport, a tax partner with Nixon Peabody LLP, who also represents the Large Public Power Council, in a telephone interview.
Primarily, commentators agreed on the proposed mandatory use of the Bureau of Public Debts computerized SLGSafe system. It ought to cut down a lot on the manual processing that Treasury staff has to undertake when subscriptions are sent by fax or mail, Decker said.
However, TBMA asked Treasury officials to amend the requirement so that agents of issuers, rather than just issuers, could submit the certifications required for redemptions before maturity through the SLGSafe program.
In general, members of the tax-exempt bond community also agreed that an indication of a subscribers intent to actually issue the bonds and some type of authorization from subscribers is appropriate. However, Treasurys proposal to require issuers to authorize a bond issue before subscribing to SLGS is unrealistic because usually that does not happen until after the bond sale, several said in written comments. Instead, they asked that the proposal require that an issuer have a reasonable expectation of issuing the bonds.
Most of the comments also agreed with Treasurys proposal to set the SLGS rates each morning rather than the night before, although some commentators asked that the rates to be set earlier than 10 a.m. as proposed.
The comments in general said most of the remaining proposed changes would harm the program and should be dropped. Those proposals included changes that would prohibit issuers from canceling subscriptions, end the trading day at 6 p.m., allow issuers to only invest funds at the same yield at which they had been invested, and eliminate an issuers ability to change the SLGS closing date by seven days.
The comments also asked Treasury to drop a proposal that would curb how an issuer can modify the size of a SLGS investment. Under current law, an issuer can change the subscription by the greater of $10 million or 10% of the amount originally specified. The proposed rules would eliminate the $10 million alternative, which would disadvantage small issuers, the comments said.
All of those things combined cause a problem because you are making the entire program less attractive, Gaffney said. We would hope that the mission of the program would continue, and some of these changes seem to reflect a path that does not ensure viable use by the issuer community.
Some market participants said that despite Treasurys claims that the so-called embedded options it is trying to eliminate in the SLGS program are costly, discouraging issuers from using the program could cost substantially more. The programs current volume is about $160 billion, and Treasury gets at least five basis points on every dollar, according to Ritter.
The Bureau of Public Debt is shooting itself in the foot, he said. That is $80 million a year, minimum.
The commentators also asked Treasury for more time and public hearings before finalizing the rules. These changes are so dramatic, we need additional time and discussions before determining a final conclusion, Gaffney said.
